MONEY UP FRONT

Although payment of a deposit is standard practice, its purpose and meaning is not widely understood.
A deposit is not strictly necessary and a contract that does not require payment of a deposit is no less enforceable than a contract that does. So why is payment of a deposit expected and what options are available in terms of paying it?

Above all, the deposit is an indication of the buyer’s intentions. Although the amount of the deposit may depend on the buyer’s financial position or the purchase price, it is nevertheless the buyer’s explicit statement that it is serious about the purchase. For the seller it is some measure of security that the buyer will perform the contract rather than lose its deposit.

The importance of the buyer’s display of seriousness and commitment via payment of a deposit cannot be overstated. Most contracts require payment of the deposit within a strict time limit and serious ramifications can follow if it is not paid on time. Late payment, even in full, can be as serious as no payment at all. Often, the seller will be entitled to terminate the contract and seize the entire deposit where it is paid late.

With the risk of forfeiting its deposit in mind, a buyer may wish to take a more cautious approach to putting its money where its mouth is. This is particularly so where the contract is subject to numerous conditions. In those circumstances, the contract may allow for several payments following particular events, such as satisfaction of due diligence enquiries, finance approval and the like. As the conditions are satisfied, the purchaser further commits itself to the purchase by further part-payments of the deposit.

It is in the seller’s interests to ensure that the total deposit does not exceed ten percent of the purchase price. If it does, the Property Law Act deems the payment to be an instalment of the purchase price, not a deposit. This also changes the nature of the contract itself. It becomes an ‘instalment contract’ and the seller’s rights if the buyer defaults under the contract may be altered at law such that they are different to those contained in the contract.

Except for some sales regulated by the Land Sales Act 1984 (such as the sale of land off an unregistered plan), a deposit does not have to be held by a real estate agent or solicitor. Indeed the deposit can be held by the seller, but in practice, it is generally held by an independent third party known as a stakeholder. The stakeholder holds the deposit on trust for both the seller and buyer pending completion of the contract. All standard contracts approved by the REIQ and Queensland Law Society provide for a deposit to be held by a stakeholder.

In long term or high deposit contracts, the deposit may appear to the buyer to be dead money. It need not be. The buyer and seller can agree that the deposit be invested and the interest earned distributed to one or both of them on completion or termination of the contract. Almost all standard contracts approved by the REIQ and Queensland Law Society contain investment provisions. The buyer and seller merely need to ask the stakeholder to invest the deposit.

Long term contracts and strong market conditions may also make other forms of deposit attractive to a buyer. For example, the buyer may be unimpressed by the return the stakeholder will obtain on investment of a large cash deposit compared with that which the buyer can secure elsewhere. This may make use of a guarantee or deposit bond more attractive to the buyer. The standard contracts approved the by the REIQ and Queensland Law Society only cater for a cash deposit. However, provided the seller considers the alternative to a cash deposit acceptable, there is no reason why a standard contract (or any specifically drafted) cannot adopt special conditions that provide for a non-cash deposit. If a guarantee or deposit bond is used, the seller should be careful to specify any conditions that might be attached to the guarantee or bond, particularly any expiry date. Expiration prior to completion of the contract, or before resolution of a dispute, could be disastrous for the seller.

A deposit is an important sign of the buyer’s goodwill and security for performance. Despite its significance, the buyer and seller should feel free to negotiate its form, times for payment and how it might be used for the benefit of both pending completion of the contract. Provided some care is taken, the deposit can be the foundation upon which a smooth sale or purchase is built.

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